Assume autonomous net taxes rise by $500; the marginal propensity to consume = 3/4.Net exports,planned investment,taxes,and government purchases are autonomous and remain fixed.Disposable income will initially
A)remain unchanged
B)fall by $500
C)fall by $375
D)fall by $2,000
E)rise by $500

Question

Quizplus · Accepted Answer

Autonomous net taxes increased by $500, which means disposable income will fall by $500. The marginal propensity to consume is 3/4, which means consumption will fall by (3/4) x $500 = $375. Therefore, the correct choice is B.

Assume Autonomous Net Taxes Rise by $500; the Marginal Propensity